In the 1990s, Enron executives sold analysts, regulators and investors on the idea that profitable competitive retailers would come to dominate electricity markets.
I’ll never forget attending a speech by the company’s enigmatic CEO Jeff Skilling, during which he asserted Enron and others in its mold would grab 71 percent of utilities’ business within five years.
I asked Skilling what would happen to the company’s business model if natural-gas prices were to triple or quintuple from the prevailing rate of about $1.00 per million British thermal units.
Unfortunately for Enron’s investors, the company’s implosion answered this question long before the firm and copycat energy retailers could live up to Skilling’s projection.
Gone are the days of round-turn trading, where energy retailers pumped up volumes by buying and selling amongst themselves without physically transferring the actual commodities.
Today’s energy retailers buy electricity from generators and other marketers and sell this power to consumers and businesses under contract. Hedges help to limit these firms’ exposure to commodity prices.
But even conservative financial and operating policies provide little assurance of profitability in this fiercely competitive and intensely regulated industry. Customer churn rates remain elevated, while weather-related fluctuations in demand and price can trigger huge losses.
After two decades of industry consolidation, the current crop of US energy retailers boasts more stability than their predecessors; consistent profitability, however, remains elusive. Accordingly, even the largest names have underperformed.
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Elliott and Roger on Jun. 30, 2021
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